Orchids Paper 3Q Profit Slips on Higher Raw Material Costs

Oct. 27, 2010 - Orchids Paper Products Company reported net income for the three months ended September 30, 2010, of $1.4 million, or $0.18 per diluted share, compared with $3.8 million or $0.52 per diluted share, in the same period in 2009. For the first nine months of 2010, net income was $5.0 million, or $0.64 per diluted share compared with net income of $10.4 million, or $1.49 per diluted share, reported for the first nine months of 2009.

THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2010

Net sales in the quarter ended September 30, 2010 were $24.5 million, which were flat compared to the net sales of $24.6 million in the same period of 2009. Net sales of converted product were $19.7 million in the 2010 quarter, a decrease of $2.5 million or 11%, compared to the same quarter in the prior year. Net sales of parent rolls were $4.9 million in the third quarter of 2010, an increase of $2.5 million, or 103%, compared to $2.4 million in parent roll sales in the same quarter in the prior year. The decrease in converted product sales resulted from a decline in tonnage shipped. Net sales of parent rolls were positively affected by a 67% increase in parent roll tonnage shipped, primarily due to excess paper making capacity resulting from lower requirements from our converting operation, and a 22% increase in the net selling price.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter ended September 30, 2010 was $4.1 million, a decrease of $2.6 million or 38%, compared to $6.7 million for the same period in the prior year. As a percent of net sales, EBITDA was 16.7% in the 2010 quarter compared with 27.1% in the 2009 quarter.

Gross profit for the quarter ended September 30, 2010 was $4.0 million, a decrease of $3.4 million or 46%, when compared with a gross profit of $7.4 million in the comparable prior year quarter. Gross profit as a percent of net sales was 16.4% in the third quarter of 2010 compared to 30.3% for the same period in 2009. As a percent of net sales, gross profit decreased primarily due to higher waste paper prices, lower shipment volumes of converted products which also caused an increase in per case converting production costs, a higher percentage of parent roll sales and higher depreciation expense. Cost of waste paper in the third quarter of 2010 was 38% higher than the cost in the same quarter of 2009, resulting in increased cost of sales of approximately $1.5 million. Unit production costs in the converting facility in the third quarter of 2010 were unfavorable to those experienced in the prior year quarter primarily due to lower period-over-period production. Parent roll tonnage shipments increased in the quarter due to increased availability of parent rolls caused by the lower requirements in converting operations and a stronger parent roll market that allowed profitable shipments to outside customers. As a result, parent roll sales increased as a percent of overall sales, which had a negative effect on overall gross profit because parent roll sales generally provide a lower gross profit margin than converted product sales.

In the third quarter of 2010, selling, general and administrative expenses totaled $1.6 million, which were $123,000, or 7%, less than the $1.8 million incurred in the same period of 2009. Reduced accruals under the incentive bonus program was the primary reason for the period-over-period decrease. As a percent of net sales, selling, general and administrative expenses decreased to 6.7% for the quarter ended September 30, 2010, compared to 7.2% for the prior year quarter.

Interest expense for the third quarter of 2010 totaled $249,000 compared to interest expense of $174,000 in the same period in 2009. The increase was primarily due to higher interest rates and increased borrowing levels due to borrowings under construction loans for a waste water treatment plant expansion and a new warehouse project.

As of September 30, 2010, the full year effective tax rate is estimated to be 30.1%. The estimated effective tax rate for the current year includes the effects of the expiration of the Federal Indian Employment Credit and accelerated depreciation on former Indian lands in Oklahoma, both of which expired as of the end of 2009.

Orchids Paper Products Company is an integrated manufacturer of tissue paper products serving the private label consumer market. The Company produces a broad range of tissue products, including paper towels, bathroom tissue and paper napkins. From its operations in Pryor, Oklahoma, Orchids Paper Products Company uses recycled waste paper to produce finished tissue products that it provides to retail chains throughout the central United States.

SOURCE: Orchids Paper Products Company